Protectionism on the rise?

Since the election of Donald Trump, the US has become more vocally protectionist. What is often overlooked, though, is that the trend is unclear or going in the opposite direction in other parts of the world.

For example, the Brexit campaign focused on the negative aspects of the free movement of people within the EU, and the UK will be leaving the largest single market in the world. However, at the same time Brexit proponents want liberal trade regimes with the EU27 countries and others. Meanwhile, in Latin America the trend is towards more liberal trade regimes, and China is likely to increase its influence in global trade matters at the expense of the US.

In the US, protectionism is clearly on the rise. The US has not only cancelled its participation in the Trans Pacific Partnership (TPP), but has also threatened to increase tariffs on imports from China and Canada, including on steel, aluminium, aircraft, lumber and dairy products. It has also forced the renegotiation of the North-American Free Trade Agreement (NAFTA). It was proceeding slowly with some moderate adjustments until the fourth round at which the US negotiators formally demanded that a new deal with Canada and Mexico favour American manufacturing and would end after five years unless renewed by all countries. The US Chamber of Commerce called those measures "poison pills", while participants in the talks called them "non-starters."1 However, despite all the threats, no tariffs have actually been implemented yet, and it is unclear if the onerous US NAFTA proposals are a negotiating tactic or a move to break up the trade agreement. If NAFTA does end, the US would stand to lose 0.1% to 0.5% of GDP over 5 years. That would be modest hit to output overall, but a significant one for the auto sector which would likely absorb most of the shock.2 The greater concern is that other negotiations are initiated with other trading partners or unilaterally. NAFTA serves as a proxy of US (anti-) globalization sentiment for the rest of the world. An overly aggressive US approach in talks could spark a trade war, which would likely result in a severe global slowdown.

In contrast to the US, Latin America has become more pro-trade as it realises the benefits of demand for its commodities from the US, the EU, China and other Asian economies. Trade has also brought foreign direct investment, technological know-how and labour mobility. Following the US exit from TPP and the ongoing NAFTA renegotiation talks, many countries in Latin America have turned proactive on free trade. Soon after the US withdrawal from TPP, Chile hosted representatives from the remaining countries3 – plus China and South Korea – in an effort to revive the agreement and support greater global economic integration. The TPP members aim for a broad agreement in the near future.

Free trade efforts are also being pushed via regional blocs, with the Alliance4 and Mercosur5 countries seeking liberal trade terms with Canada and the EU, respectively. Mexico, which has plenty to lose from a potential dissolution of NAFTA (more than 80% of Mexican exports go to the US), is also trying to gain leverage with the US by expanding its free trade agreement (FTA) with the EU. Meanwhile, China views the current situation as an opportunity to increase its influence, and has initiated trade discussions with Colombia and Uruguay. It already has bilateral agreements with Peru, Chile and Costa Rica.

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References

1. According to CNBC, 17 October 2017.

2. US Daily: Thoughts on the Potential US Withdrawal from NAFTA, Goldman Sachs, 19 October 2017.

3. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam

4. The trade bloc that includes Colombia, Mexico, Chile and Peru.

5. The trade bloc that includes Argentina, Brazil, Paraguay, Uruguay and Venezuela, although Venezuela has been suspended as of late 2016.

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